Lloyd Blankfein Would Like Everyone to Get with Program Re: Mark-to-Market Accounting
This means you, Steve Schwarzman. And you, writers of FASB hate mail. It’s about time you all got on board.
“We are not moving away from mark-to-market accounting,” Mr. Blankfein said Tuesday. “The more we work with it and live with it the more I wish that everybody else would act in a corresponding way.”
You have your orders.
A Mountain of Hate Mail Gets FASB to Backtrack on Fair Value
If the drinks at Davos weren’t already free, we’re pretty sure Stephen Schwarzman would be buying.
From the Journal’s man on the accounting beat, Michael Rapoport:
Accounting rule makers took a key step Tuesday to reverse a proposal that would have required banks to value their loans based on the ups and downs of the market. The Financial Accounting Standards Board agreed that companies could continue to carry a variety of financial assets and liabilities at amortized cost, an adjusted version of their original cost, as they do now. That would reverse a proposal the board introduced last May that would have required bank loans and other financial assets to be carried at “fair value,” based on market prices.
What happened, you ask? What caused the FASB to fold like a cheap lawn chair? Remember all those nastygrams that were sent to Bob Herz? It sounds like the FASB took those personally:
FASB indicated the overwhelmingly negative reaction to its proposal, from companies and investors alike, played a big role in prompting the board to change its mind. The board received more than 2,800 comment letters on its fair-value proposal, most of them opposed to the move, and heard more opposition at a series of public roundtables before it began reconsideration of its proposal for fair-value changes.
So the bankers win this round. Oh, wait…they win every round.
To Keep People From Nodding Off, Stephen Schwarzman Reminded Everyone How Much He Hates Mark-to-Market Accounting
The Blackstone Group co-founder, chairman and CEO is in Seoul hobnobbing with various other titans of industry, finance and politics for the G-20 Business Summit and as you might expect, things can get a little drab.
Dark suits, heavy lunches, important people trying to one-up each other’s stories and so on and so forth can really get tiresome so in order to “keep people awake,” SS brought up a topic near and dear to his heart:
[I]n the United States, we eliminated mark-to-market accounting in 1937, and why did we do that? We completely bankrupted our system before, and for some reason, somebody who liked something called transparency decided to have mark-to-market accounting come back, around the turn of the last century. So it in no way surprises me that we had a catastrophic collapse as a result of implementing mark-to-market accounting.
Not exactly sure who “somebody” is but one guy has retired and another is on his way out, so this could be Schwarzman’s reminder to the outgoing MTM cheerleaders that he hasn’t changed his stance that the whole thing just sucks.
Accounting News Roundup: Lehman Investigation Narrows, SEC to Bring Charges Someday; Dubai World’s Debt Deal; Trump Makes Offer to Park51 Investor | 09.10.10
SEC Homes In on Lehman, ‘Funds of Funds’ [WSJ]
“The Securities and Exchange Commission’s investigation into the collapse of Lehman Brothers Holdings Inc. is zeroing in on an accounting maneuver used to give the appearance that the company t levels, according to people familiar with the situation.
Agency officials also are probing whether former Lehman executives failed to adequately mark down the value of the huge real-estate portfolio acquired in the securities firm’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors, these people said.
The narrowing probe could move the SEC closer to bringing civil charges related to Lehman’s collapse in September 2008, though a decision doesn’t appear imminent.”
Study Says Directors Favor Themselves, Not Shareholders [FINS]
“A new study found that directors who field whistleblowing claims are likely to discount charges that could threaten their board seats and will assign fewer resources into investigating such claims.
In weighing hypothetical charges, 83 veteran directors at large U.S. corporations said they would allocate 42% fewer resources on average to fraud tips that might ultimately cost them their board seats.”
Dubai World reaches $24.9 billion debt deal [Reuters]
“State-owned conglomerate Dubai World DBWLD.UL on Friday reached a formal deal to restructure around $24.9 billion of liabilities, partly easing recently heightened concerns over the Gulf emirate’s debt woes.
While Dubai World’s agreement with most of its creditors is seen as a positive step for Dubai, the announcement comes just days after a unit of Dubai Holding, the conglomerate owned by Dubai’s ruler, said it will delay repayment on a $555 million loan, the second time it has failed to meet a repayment deadline.”
Huguette Clark’s multi-million-dollar fortune remains in hands of her financial managers [NYDN]
“Millionaire recluse Huguette Clark’s $500 million fortune will remain in the hands of financial managers who are under investigation, a Manhattan judge decided Thursday.
Judge Laura Visitacion-Lewis tossed a request by Clark’s relatives to appoint an independent guardian to oversee her finances and property, including Fifth Avenue’s biggest co-op apartment.
The judge called the family’s concerns about Clark’s health and state of mind “speculative” and “insufficient” to merit wresting control from her lawyer, Wallace Bock, and accountant, Irving Kamsler.”
Control Freak Q&A With Caleb Newquist [Control Freak]
Approva’s Control Freak blog asked me what I liked about being “control freaky.” Check out this post for the answer and more bits of wisdom from Adrienne’s favorite blogger.
Trump Offers to Buy Out Islamic Center Investor [WSJ]
“Mr. El-Gamal, founder of SoHo Properties, is one of eight investors who paid $4.8 million for a building two blocks from the site of the Sept. 11 terrorist attacks.
The statement came following reports that real estate mogul Donald Trump was offering to buy one investor’s stake in the property.
In a letter to Hisham Elzanaty, an Egyptian-born Long Island businessman and a major investor in the project, Mr. Trump offered to buy his stake for 25% more than Mr. Elzanaty paid for it.”
Former GE Unit Executive Says He Was Pushed Out for Questioning Accounting [Bloomberg]
“General Electric Capital Services was sued by a former executive who claims he was forced out for questioning the company’s treatment of an asset.
Edward Gormbley, who worked for GE Capital from 2000 until he quit in September 2009, filed his suit today in state court in Stamford, Connecticut. The complaint also names parent General Electric Co. and its chief executive officer, Jeffrey Immelt.
Gormbley said he was punished for challenging the valuation of silicon-maker Momentive Performance Materials, an investment asset. GE Capital overstated Momentive’s value in December 2008 to improve its own balance sheet, he said. Valuing the asset correctly would have reduced ‘GE Capital’s earnings 100 percent,’ in the fourth quarter that year, according to the complaint.”
The Two Best Comment Letters Written to the FASB You’ll Ever Read
Last month we told you about how the American Bankers Association encouraged anyone that disagreed with the FASB’s proposed fair value rule to write a letter telling Herz & Co. how much the proposal su ind enough to provide a template for said “FASB Blows” correspondence so the anti-fair value crowd could get the gist of what needed to be said.
The ABA did warn, however, that the FASB hates, loathes, DETESTS form letters, so in order to make a valid point, it was advisable to not simple slap your name in the appropriate place but to articular your own special brand of hatred for the FASB.
As you may recall, many ABA groupies did not heed this warning, which no doubt resulted in Bob Herz and the rest of the Norwalk team using the letters to stoke their mid-summer weenie roast bonfire.
As disappointed as the ABA must have been with the lack of originality, we were sent this shining example that has been making the rounds at the Big 4 (or so we’re told). Our guess is that this is more of what the ABA had in mind:
Bravo, James C. Blaine. Bravo. You are most definitely into the brevity thing. You have, presumably, made the ABA proud. But wait, there is a pro-fair value letter worthy of these pages.
Granted, it was written back in May but Brian Cowell is no less passionate than Mr Blaine:
Nicely done, both of you. Everyone take note.
Good Riddance to Old Lease Accounting Rules
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
I see that FASB is sticking to its schedule for ending most off-balance-sheet treatment for leases, and so is the IASB. It’s about time, frankly, if only to spare us poor, I mean, intrepid financial journalists from having to sort through the particulars of the current accounting treatment a moment longer than necessary.
I speak from personal experience here, having wrestled with the false distinction between capital and operating leases for a sidebar to a piece I wrote for CFO Magazine way back when. The article delved into the details of a particularly complex variation that companies were using to finance real estate, called synthetic leases.
I swear, that sidebar itself shaved a year off my life, and at my age, every one counts, and did even a decade or so ago.
In fact, the hoops that companies must jump though to get a deal to qualify as an operating lease still make my head spin. Consider: In order to qualify, the current rule, known as FAS 13, requires that the lease fail all of four tests aimed at distinguishing the financing from being the equivalent of ownership.
The thing that puzzled me about all this is that many, if not most, CFOs claimed that accounting treatment wasn’t the reason, or at least not the main one, that they used such financing techniques in the first place.
But the reason they gave often came down to their advantageous cost, and like all off-balance-sheet financing techniques, I could never quite understand how that lower cost arose without the accounting treatment.
After all, it seemed to me the only reason operating leases were less expensive than capital leases was that the underlying asset wasn’t counted as the property of the company by a sufficient number of investors willing to therefore pay a premium for the company’s equity. And if they did that, they were ignoring the fact that the asset was indeed the property of the company on anything other than a narrow, legal basis, and that the arrangement wasn’t financing its purchase.
So tell me again how off-balance-sheet financing results in lower cost if it doesn’t really do that.
More Than a Few People Didn’t Heed the ABA’s Advice re: “Fair Value Sucks” Letters to the FASB
Just last week we mentioned the American Bankers Association and its efforts to undermine the FASB’s latest fair value proposal that, in the ABA’s mind, could bring down civilization as we know it.
Because of this danger, the ABA encouraged “investors” through email and on its website to write individual letters to the FASB, expressing their displeasure with the worst idea in the modern history of double-entry accounting. We say “investors” because the ABA not-so-subtly asked everyone (i.e. who felt the overwhelming urge to write Bob Herz & Co.) to refer to themselves as such.
Further, the ABA provided a template of a letter to send to the Board for the “investors,” however, it did warn to resist using the example as their own because A) this is far too important and telling the FASB that fair value pains you in the deepness of your soul and takes food out of your children’s mouths will be a far more effective narrative; and B) the FASB hates form letters. HATES. So much so that Bob Herz rips up all his gold stars that he gives for the constructive letters he receives and then your unoriginal ass gets negative points.
The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.”
Simple enough, right? Well, maybe. But In his column today, Jonathan Weil gives an example of one ABA soldier that wasn’t very good at following instructions:
Among the letter writers was Terry L. Stevens of Francesville, Indiana, who identified himself as a bank investor, as the ABA had suggested. He didn’t mention that he also is chief financial officer and executive vice president of Alliance Bank, a closely held lender in Francesville with $270 million of assets.
“As a bank investor, of utmost importance to me regarding the banks in which I own stock is their financial position, and transparent financial reporting is key in order for me to make investment decisions,” Stevens’ letter said. “With this in mind, I am writing to express my deep concerns and opposition to the portion of the proposal that requires all financial instruments to be marked to market.”
Stevens didn’t write those words himself. He copied them verbatim from a sample letter the ABA posted on its Web page. So, too, did a bunch of other bankers who submitted comment letters to the FASB opposing its proposal, notwithstanding the ABA’s warning that they shouldn’t do cut-and-paste jobs.
This had to be a mistake, right? This is far too important of an issue to the banks of this country that a mishap like this could just happen. Bankers are responsible people that take this stuff very seriously and would never risk going through the motions just to serve at the whims of their lobby’s voice…would they?
Stevens told me he didn’t have time to write his own letter from scratch. “The points that I grabbed out of their paragraphs did a good job of explaining how I felt about the situation,” he said.
Stealth Bankers Bomb as Anti-Reform Crusaders [Jonathan Weil/Bloomberg]
Accounting News Roundup: BP in Talks to Sell Assets, Including Alaska Ops; Koss Lawsuit Details Embezzlement ‘Spurts’; The Estate Planing Debacle | 07.12.10
BP Mulls Selling Off Billions in Assets [WSJ]
“BP PLC is in talks with U.S. independent oil and gas pr on a deal worth as much as $10 billion that could include stakes in BP’s vast Alaska operations, according to people familiar with the matter.
A deal, which would go a long way to helping BP cope with the financial stress of paying for the clean-up of the Gulf oil spill, could be reached in the coming weeks, though there is no guarantee it will succeed, one of these people said.”
Bank Profits Depend on Debt-Writedown `Abomination’ [Bloomberg]
This abomination has an official name, SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
“Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.
Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote.”
Koss embezzlement ran in spurts, lawsuit says [Milwaukee Journal-Sentinel]
The most impressive “spurt?” $478,375 over three days in 2006. According to Koss’ lawsuit against S-squared and Grant Thornton, $145,000 also disappeared from the petty cash fund over the years, amongst other “unauthorized transactions.”
Bias At Work: To Sue or Not to Sue? [FINS]
Harassed? Discriminated against based on age, sexual orientation, race et al.? Of course suing your employer is an option. This is America after all, where the opportunity to slap someone with a lawsuit is your god-given right. But is it always the right move?
Bolt running from the taxman – Usain snub for British meeting [Daily Mail]
The fastest man in the world would prefer to keep a little money for himself, “Under present tax rules, if Bolt competes once in Britain and only five races elsewhere, the British taxman will demand one-sixth of everything he earns, whether in Britain or not. His taxable earnings would not only include his considerable appearance fees but also his hefty endorsement contracts.”
The Big Four’s UK Firms Pick Up Non-Executive Directors — And Then …? [Re:Balance]
Jim Peterson expands on his thoughts about the Big 4 non-executive directors in the UK, “Not only can good governance not be inflicted or imposed, in other words, because resistant leaders will find ways to disturb or subvert the purpose, but a virtuous culture will display its legitimacy without the need for pietistic overlays.”
Too Rich to Live? [WSJ]
The estate tax debate has gotten even more morbid than it would ordinarily be, ” ‘You don’t know whether to commit suicide or just go on living and working,’ says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year.”
The ABA Is Encouraging Everyone to Be Original in Their “Fair Value Sucks” Emails to the FASB
Banks hate the FASB. This is understood. They’re especially bent out of shape these days because the Board recently put out its latest fair value proposal that requires them to carry their loans at fair value. Bob Herz knew that this was going to cause hella-belly aching although he may not have predicted the virtual assault that was coming.
Banking lobbyists have launched an e- mail and Web campaign to mobilize investors against a proposed expansion of fair-value accounting rules that may force banks such as Citigroup Inc. and Wells Fargo & Co. to write down billions of dollars of assets.
The American Bankers Association opposes the Financial Accounting Standards Board’s plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.
The association’s website, noting that FASB’s stated mission is to serve investors, provides a sample letter for people writing to the board and suggests they focus on why the proposal isn’t “useful for investors.”
As you can see, the banks are bringing out the big guns, although this not unfamiliar territory for the FASB. Lynn Turner, a Senior Advisor and Managing Director at LECG and former Chief Accountant SEC wrote in an email to GC, “This campaign is very similar to the efforts of the technology companies campaign against the FASB in 1993-95 to prevent rules that would have required those companies to expense the value of their stock options, something that ultimately led to investor losses and problems in the markets.”
The FASB prevailed in that particular battle but the ABA is wise to their ways, encouraging everyone to resist going through the motions on this one:
The association’s Web page, titled “Guidance for Investors Regarding FASB’s Mark-to-Market Proposal,” includes a sample letter to the board “for educational purposes only.” The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.” Those who comment should “let FASB know that you are an investor,” the ABA says.
So resist the urge to copy and paste anti-FASBites. They won’t really know how deep your loathing is for MTM if you go with the standard letter.
U.S. Banks Recruit Investors to Kill FASB Fair-Value Proposal [Bloomberg BusinessWeek]
Accounting News Roundup: E&Y to Appoint Non-Exec Directors to Global Board; Accounting Remains a Hot Post-College Job; Barclays Calls New Loan Valuation Proposal ‘Potentially Misleading’ | 07.06.10
‘Big four’ auditors bring in independent directors in response to regulators [Guardian]
The Financial Reporting Counc CAEW, issued a new audit governance code back in January that recommended audit firms appoint non-executive directors to their UK firm however, Ernst & Young will go so far to appoint them to their global advisory boards.
“Although the code technically applies only to our UK business, as a globally integrated organisation, we believe it is most appropriate for us to implement the code’s provisions on a global basis also,” said Jim Turley, global chairman and chief executive of Ernst & Young. “Including individuals from outside Ernst & Young on the global advisory council will bring to the senior leadership of our global organisation the benefit of significant outside perspectives and views.”
BP Won’t Issue New Equity to Cover Spill Costs [WSJ]
But if you want to pitch in, they are happy to take you up on an offer, “BP would welcome it if any existing shareholders or new investors want to expand their holding in the company, she said. BP’s shares have lost almost half their value since the Deepwater Horizon explosion that triggered the oil spill April 20.
BP Chief Executive Tony Hayward is visiting oil-rich Azerbaijan amid speculation the company may sell assets to help pay for the clean-up of the Gulf of Mexico oil spill. The one-day visit comes a week after Mr. Hayward, who has been criticized for his handling of the devastating oil spill, traveled to Moscow to reassure Russia that the British energy company is committed to investments there.”
Looking for a post-college job? Try accounting [CNN]
Happy times continue for accounting grads, according to the latest survey on the matter, this time from the National Association of Colleges and Employers. The average salary listed for an entry-level accounting major is just over $50k and the article also notes that most accounting jobs go to…wait…accounting majors.
FASB, IASB Staff Describe Plans for New Financial Statements [Compliance Week]
As always, the two Boards are hoping that bright financial statement users will chime in with their suggestions but they’ve got the basic idea down, “The FASB and IASB are rewriting the manner in which financial information is presented to make it more cohesive, easier to comprehend, and more comparable across different entities. The proposals would establish a common structure for each of the financial statements with required sections, categories, subcategories and related subtotals. It would result in the display of related information in the same sections, categories and subcategories across all statements.”
Accounting rules “practically impossible to implement”, Barclays claims [Accountancy Age]
Barclays’ finance director, Chris Lucas isn’t too keen on these new loan valuation proposals. Besides the ‘practically impossible’ thing, he says, “The sensitivity disclosures…are highly subjective, difficult to interpret, and potentially misleading, particularly when the underlying data is itself highly subjective,” Lucas said.
“It is hard to see how sensitivity disclosures could be aggregated by a large institution to provide succinct data that avoids ‘boilerplate’ disclosure.”
Asking The Difficult Questions [Re: The Auditors]
“Audit committees too often rely on the auditors’ required disclosures without comment. They sometimes lack the independence, experience, or determination to ask the probing questions. It’s critical, however, that committees seek answers to vexing questions and not accept the response, ‘But that’s the way management has always done it.’ ”
Buffett Donates $1.6 Billion in Biggest Gift Since 2008 Crisis [Bloomberg]
WB continues his plan of giving away 99% of his fortune, “[Buffet] made his largest donation since the 2008 financial crisis after profits at his Berkshire Hathaway Inc. jumped.
The value of Buffett’s annual gift to the foundation established by Bill Gates rose 28 percent to $1.6 billion from $1.25 billion last year. The donation, made in Berkshire Class B stock, was accompanied by gifts totaling $328 million in shares to three charities run by Buffett’s children and another named for his late first wife, according to a July 2 filing.”
The case for cloud accounting [AccMan]
Dennis Howlett continues to provide evidence that switching to the cloud provides benefits that are simply too big to ignore, “This 2min 1 sec video neatly encapsulates why this is something you should be considering, especially if you are operating electronic CRM or e-commerce for front of house activities.”
Regulators’ Exposure of Accounting Loophole Helped Banks Hide Risk
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
Not exactly shocking news but one of the mysteries of the financial crisis is how it came to be that banks ended up with r transferred to investors.
Sure, it’s well known that the assets banks removed from their balance sheets did not shift much risk to investors after all, thanks to liquidity guarantees they supplied to investors. But that even took former Citigroup vice chairman and Treasury secretary Robert Rubin by surprise, as Rubin said he didn’t know such guarantees existed until after the bank was forced to increase its capital reserves because it had to make good on them.
Now research that came out a year ago but was revised late last month helps clarify what went awry.
It turns out that a conflict between the Financial Accounting Standards Board and federal bank regulators was even more critical than I thought it was when I reported it in 2004. The conflict arose after FASB voted to require commercial banks to consolidate such vehicles after such financing arrangements caused energy trading firm Enron Corp. to fail.
I was aware that the regulators asked the FASB to delay the new accounting rule and that the board eventually provided an exemption for so-called “qualified” special purpose entities, which provided a loophole from consolidation so long as they vehicles weren’t actively managed.
But the full significance of that escaped me until I saw the research, which shows that securitization along the lines of Enron’s — guarantees that limited or even eliminated investor risk — exploded after bank regulators codified the exemption in their capital requirements. Indeed, the exemption essentially paved the way for banks to use more off-balance-sheet financing vehicles that masked their true risk.
How exactly? In late 2004, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of Thrift Supervision decided that asset-backed commercial paper put into special purpose vehicles known as conduits would not have to be consolidated for purposes of calculating capital requirements. And the regulators decided that banks need only reserve against 10 percent of the amounts put into conduits even when they guaranteed that investors would be repaid if there were a run on the conduits. Previously, securitizations typically put investors on the hook for that risk.
The research, originally published in May 2009 but revised in late January and entitled “Securitization without Risk Transfer,” found that the amount of subprime assets securitized through such vehicles soared in the wake of the exemption, even though the liquidity guarantees extended to investors meant that little or no risk had been transferred to them.
“Regulation should either treat off-balance-sheet activities with recourse as on-balance sheet for capital requirement and accounting disclosure purposes, or, require that off-balance sheet activities do not have recourse to bank balance sheets,” the authors, Viral V. Acharya and Philipp Schnabl of New York University and Gustavo Suarez of the Federal Reserve, conclude. “The current treatment appears to be a recipe for disaster, from the standpoint of transparency as well as capital adequacy of the financial intermediation sector as a whole.”
The FASB Buckles
Bob Herz must be feeling a little blue now that his buddy Tweeds announced that he is hanging up his eyeshade.
This melancholic state has apparently led Herz to the conclusion that it’ll be okay to let banking regulators “use their own judgment” when it comes to letting banks stray from almighty GAAP:
“Handcuffing regula orting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.
“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”
Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.
Herz is calling it “decoupling” of the rules which sounds a hell of a lot like “the rules are the rules only when they don’t work out so well for banks.” Not sure about anyone else but it sounds like Herz is caving to political pressure after insisting that everyone butt out.
Because if we read that correctly, any time banking regulators are feeling sketchy about the market’s ability to put value on the banks’ assets, they’ll just call a time out on fair value with no ringing up the FASB, auditors, or anybody else to get a permission slip?
Will banking regulators even know when the market is being irrational? If you were to ask JDA, she’d probably say, “No fucking way.”
A less irreverent but similar point of view from Daniel Indiviglio at the Atlantic:
I worry that if regulators are provided this flexibility, then they will always suspend mark-to-market accounting when a crisis hits. But in cases where the market permanently corrects the value of assets downward, their values would remain elevated in the regulators’ eyes. Then, once the crisis appears to improve, banks will eventually cause a sort of secondary crisis when they are forced to begin realizing the decline in the value of those assets.
Moreover, I worry about how investors will react to this change. Imagine you’re an investor. A crisis hits, and regulators step in to suspend mark-to-market accounting for a bank you own equity in. Are you worried? I sure would be — regulators were so concerned about the bank’s assets that they felt forced to suspend mark-to-market accounting! As an investor, I’ll still do my own math to figure out what I think the bank’s assets are worth. So investors might dump the stock anyway, endangering the value of the institution despite this move by regulators.
So it’s fair value unless we’re in a potential shit + fan situation. In the off-chance that the regulators recognize the impending disaster, they’ll tell the banks to forget fair value for now. Then once everything is hunky dory, we go back to fair value. Whatever, we’re over it.
Board to Propose More Flexible Accounting Rules for Banks [Floyd Norris/NYT]
Should Regulators Be Able To Suspend Accounting Rules? [The Atlantic]
Also see: Decouple US accounting rules, bank regulation-FASB [Reuters]
Barney Frank Doesn’t Legislate Accounting, He Only ‘Exerts Pressure’
As you may know, the mere thought of Congress legislating accounting rules makes us nauseous to the point of passing out. Barney Frank, in an attempt to alleviate this common malady among accountants, has been quoted by Web CPA saying that “We will never legislate accounting while I’m chairman [of the Financial Services Committee]”.
According to the piece, Barn says that when he, and the rest of the committee, whipped Bob Herz, FASB Chairman, into submission over changes in mark-to-market rules, this was not legislating, this was “exerting pressure”.
Depending on who you ask (ahem, Hank Paulson), exerting pressure could easily be confused with “threatening” and threatening is clearly how legislation gets done in this country, whether it’s got a signature on it or not. So call it what you like, Barney-boy, we’re on to your doublespeak .
Barney Frank: ‘We Will Never Legislate Accounting’ [Web CPA]
Newt Gingrich Doesn’t Like the FASB
Congress seems hella determined to keep accountants from writing accounting rules. HR 1349, aka the Federal Accounting Oversight Board Act, which was introduced in the Spring would create a board that would consist of the chairs of the Fed, SEC, FDIC, PCAOB, and the Secretary of the Treasury.
This merry band of bureaucrats would basically get to slap the FASB around whenever they want. According to Newt “My head isn’t that big” Gingrich, a supporter of the bill, because of the FASB’S independence, politicians can’t torpedo accounting rules that are “destructive”.
More, after the jump
This gem of legislation has 14 co-sponsors, including seven members from the House Financial Services Committee, along with Gingrich and Paul Volcker. It has been referred to the Financial Services Committee so it will getting some Barney Frank lovin’ soon enough.
Say what you will about the wonks in Norwalk but we’re of the strong opinion that handing over the accounting rule bazooka to this board could possibly be the worst legislation since…anything Maxine Waters has introduced.
Congressional Bill Supports Federal Takeover of Financial Reporting [FinCriAdvisor via Jr. Deputy Accountant]
FASB, Bankers to Continue ‘Religious War’ Over Fair Value
Apparently the wonks in Norwalk are girding up their loins to take on the banks again over fair value, described by FASB member Marc Siegel as a “religious war” (our pick would be The Crusades).
Under new preliminary proposals issued by the FASB last week, all financial assets, including loans would be marked to market every quarter and classifications like held to maturity, held for investment, and held for sale would go the way of the Dodo.
Jonathan Weil conceptulizes:
Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.
Got it? Well, banks are obviously not cool with this, as one lobbyist is quoted, “I guess the nicest thing I can say is it’s difficult to find the good in this.” I guess it’s on then bitches, as it sounds like the banks would much rather bleed out their orifices until the bitter, bitter end as opposed to report anything that is remotely transparent.
Accountants Gain Courage to Stand Up to Bankers: Jonathan Weil [Bloomberg]